6 Types of Loans and How They Work

Did you know?  Roughly 80% of U.S. homeowners with a mortgage have an interest rate below 6% (as of early 2026), creating a “lock-in effect” that limits existing home sales. (Source)

Getting a loan can help you reach important life goals that you otherwise couldn’t afford. A mortgage, for example, can help you realize your dream of purchasing your first home. 

This guide will provide clarification regardless of whether you are familiar with loan types or this is your first time investigating them. You should be aware of the following six loan types to make wise choices:

Let’s begin!

Key Takeaways 

• Understanding everything about the mortgages 
• Looking at the unique relevance of personal loans 
• Decoding the perks of debt consolidation loans 
• Exploring the various advantages of small business loans and home equity loans 

1. Mortgages

A mortgage loan is acquired to cover the purchase price of a home. Note that a mortgage generally doesn’t include the down payment. 

Moreover, mortgage loans are secured, which means the property you’ve bought acts as collateral. The lender can foreclose on your property if you miss mortgage payments. 

The interest rates and loan terms vary from lender to lender. Generally speaking, mortgages can be repaid over 15, 20, or 30 years. Moreover, interest rates are locked for a set period (usually 1–5 years), offering stability.

2. Personal Loans

Mortgages and auto loans are designed for specific purposes. But personal loans can be used for anything you choose. Some people use it for an emergency home repair job, and others to fund their wedding.

Personal loans are usually unsecured, which means they aren’t backed by collateral. Approval is based on your credit score and employment history. If you’ve maintained a good credit score over time and have a stable income, you can easily qualify for a personal loan. 

3. Auto Loans

These are secured loans specifically offered to buy a vehicle. Lenders let you borrow against the car’s price, minus any down payment. Auto loan terms generally range from 36 months to 72 months, although there is always room available for customizing your terms and conditions according to your lending amount and collateral.

Interesting Facts 
Unsecured loans and credit card debt can become unmanageable if not paid promptly.

4. Debt Consolidation Loans

Tired of paying hefty loan payments every month? It’s like your entire paycheck goes toward payments. A debt consolidation can provide some significant relief in your debt consolidation without any hassle of loosing more money and time.

The process is pretty simple: You take out a new loan for an amount equal to your total existing debt. Then, you use those funds to pay off all individual creditors. Most debt consolidation loans Australia are unsecured, which means they are based on your creditworthiness.

A lender would assess the following:

• Your credit score 
• Your debt-to-income (DTI) ratio
• Proof of income

A debt consolidation loan ensures simplicity, like anything else. You make one monthly payment instead of multiple payments to different creditors. This can ensure better budgeting and peace of mind.

5. Small Business Loans

Trying to turn your passion into a lucrative business model, but don’t have enough funds? Small business loans can do the trick. These are designed to help entrepreneurs start, operate, or expand their businesses. 

A small business loan can cover core expenses like inventory, equipment, or payroll. This way, you have the opportunity to focus on other critical operations. It’s a win-win situation.

6. Home Equity Loans

A Home Equity Line of Credit (HELOC) is a secured, revolving loan that enables homeowners to take out loans against the equity in their house. These loans can be used to pay for major expenses like schooling and renovations.

There are two phases of acquiring a HELOC:

• Draw Period: During this period (5-10 years), you can access funds and might only pay interest.
• Repayment Period: The remaining time (10-20 years) during which you must repay both principal and interest.

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